In the first week of September, Halifax, TSB and HSBC all trimmed fixed mortgage rates while the wholesale costs those fixes are built on went sharply the other way. Moneyfacts’ Rachel Springall said on 2 September that swap rates “have risen dramatically over the past week, reaching 30-day highs”, and that the UK 10-year gilt yield had climbed above 5.2%, its highest since 2008.
Only one of those facts can win. Moneyfacts figures for 2 September put the cheapest remortgage two-year fix at 4.55% and the cheapest homebuyer two-year fix at 4.47%, against an average two-year fix of 5.59% on 3 September. Those best buys are, for now, priced below where the market says funding costs. Here is why that happens, why it never lasts, and why panic is still the wrong response.
What are swap rates and why do they set fixed mortgage rates?
A fixed-rate mortgage is a promise to take a set rate for two or five years whatever happens in between. That is a risk for a lender funding itself at rates that move, so lenders hedge it with interest rate swaps: contracts that exchange a floating stream of interest for a fixed one over a matching term.
The price of that contract is the swap rate, in effect the market’s forecast of average short-term rates over the term. A lender prices a fix by starting from the matching swap and adding its costs, risk margin and profit, so when the swap moves the poster rate moves with it. Gilt yields, the benchmark for long-term sterling borrowing, pull in the same direction: a 10-year yield at its highest since 2008 drags swaps up because both price the same expectation of rates staying higher for longer.
Why does Bank Rate matter less to a fixed rate than most people think?
Bank Rate has sat at 3.75% since 18 December 2025 and was held again on 30 July, yet fixed-rate pricing has moved throughout. Bank Rate is a today number; a fixed rate is a next-five-years number.
| Rate type | What mainly moves it | Speed of response |
|---|---|---|
| Tracker | Bank Rate directly, by contract | Usually the month after a decision |
| Standard variable rate | Bank Rate, at the lender’s discretion | Days to weeks, often only partly |
| Two-year fixed rate | Two-year swap rate | Continuous, with a repricing lag |
| Five-year fixed rate | Five-year swap rate | Continuous, with a repricing lag |
Fixes follow the market’s forecast of Bank Rate, which is far more volatile than Bank Rate itself. That is why UK mortgage rates went up in August while Bank Rate did not.
The forecast has shifted because the inflation picture has. Governor Andrew Bailey said on 30 July that inflation had fallen faster than expected but that the Middle East conflict meant high and volatile energy prices. Ofgem gave that worry a number on 26 August: the price cap rises 4% to £1,723 from 1 October, on wholesale gas up 11% in three months. That is what makes investors demand a higher yield.
Why would a lender cut rates into a rising market?
Three reasons, usually together.
The first is volume. The Bank of England’s Money and Credit release on 1 September showed 56,053 mortgage approvals for house purchase in July, the lowest since January 2024 and down from a revised 58,215 in June. A weak summer leaves lending targets short, and competition for a thin pool of borrowers drove the week’s cuts: Halifax by up to 0.11 percentage points for purchase and 0.13 for remortgage, TSB by up to 0.20 points across two, three and five-year products, HSBC on two- and five-year remortgage rates.
The second is timing. A cut announced on 1 September was almost certainly agreed on August swap rates; the lender has not yet caught up.
The third is hedging. Lenders buy swaps in tranches, in advance, to cover planned lending. A tranche bought before the move is locked at the old price, so fixes can be sold against it until it runs out. The next tranche costs what swaps cost now.
What were the cheapest deals on offer this week?
| Borrower type (Moneyfacts, 2 September) | Two-year fix | Five-year fix |
|---|---|---|
| Remortgage | 4.55% (HSBC) | 4.65% (HSBC and Principality BS) |
| Home purchase | 4.47% (Santander) | 4.51% (Santander and HSBC) |
| First-time buyer at 90% LTV | 4.78% (West Brom BS) | 4.79% (first direct) |
| Market average, 3 September | 5.59% | 5.63% |
The best buy sits more than a full point below the average in every column, a reminder of why the advertised mortgage rate is not the rate most borrowers are offered. The best buys also carry the thinnest margin over the swap, so they go first.
Why does the window close so quickly?
When swaps jump, the deals closest to the old funding cost turn loss-making first. A lender at 4.47% has less room than one at 5.59%, so the market leader acts first, usually by withdrawing the product at short notice before it attracts applications the lender no longer wants at that price. That is why Moneyfacts urged borrowers on 2 September to secure a new deal quickly.
None of this is a prediction: swaps rose over one week and can fall back the next. The narrower point is that a lender cutting into a rising market is spending down a hedge or chasing a target, and both run out.
Does any of this mean a borrower should rush?
Here is the case against the headline. Nobody can time swap rates, including the lenders. A borrower who grabs a two-year fix because five-year swaps look expensive, while planning to stay put for a decade, has solved a small problem by creating a large one. Early repayment charges, or refixing in two years into a market nobody can foresee, will generally cost more than a rate that moved a fifth of a point during the decision. The term is the decision; the rate is only its price. A deal ending within six months can usually be reserved now and switched if pricing improves.
The 17 September decision deserves the same treatment. Whether the MPC holds at 3.75% or not, fixes may do nothing, because the swap market has already priced in what it expects. The decision that moves trackers is not the one that moves the two-year fix.
Frequently asked questions
What is the difference between a swap rate and Bank Rate?
Bank Rate is the rate the Bank of England sets today. A swap rate is the market’s price for exchanging floating interest for fixed over a set term, so it reflects where investors expect Bank Rate to average over that term.
Why did a rise in the 10-year gilt yield affect two-year mortgage rates?
Gilt yields and swap rates price the same expectations for inflation and interest rates, so a higher-for-longer view in gilts feeds straight into the swaps lenders use to price fixes.
If lenders are still cutting, is the market really getting worse?
The cuts in the week to 1 September were agreed on earlier swap levels to win volume after weak July approvals. They describe lenders’ targets, not where funding costs are heading.
Will fixed rates fall if the Bank cuts on 17 September?
Not necessarily. If a cut is expected, the swap market has already priced it in and fixes may not move. Only trackers and variable rates follow the decision directly.
The week’s rate cuts and the week’s rise in swap rates are not a contradiction; they are a lag. Lenders are selling last month’s funding costs into a market that has moved, and the deals nearest the edge go first. Worth knowing if a fix is ending soon, but not a reason to choose the wrong term in a hurry.
